Require Forex Dealer Members to affirmatively disclose that customer funds may not be protected under bankruptcy law; and

Codify the current requirement to file weekly forex reports and impose an automatic fee on Forex Dealer Members filing late reports.

Disclosure Regarding Bankruptcy Protections

The Refco, Inc. bankruptcy proceedings, which included its affiliate Refco FX, highlight concerns about bankruptcy protection for retail forex customers. The Refco bankruptcy prompted customers of Forex Dealer Members to call NFA regarding the safety of their funds if their dealers become insolvent. Based on those calls, it is obvious that some customers believe their funds are protected under the bankruptcy laws.

As you know, Subchapter IV of the U.S. Bankruptcy Code provides special protections for customers trading on an exchange, including a priority in bankruptcy and the right to have their positions transferred or liquidated. The Code applies these protections to funds owed to customers in connection with exchange-traded futures and options, leverage contracts regulated under Section 19 of the Commodity Exchange Act, and dealer options regulated under Section 4c(b) of the Act. The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 added "any other agreement or transaction that is similar," but it is not clear that this language would cover off-exchange retail forex transactions. Therefore, forex customers may be general creditors, with no priority in bankruptcy and no right to transfer or liquidate their positions.

Although some Forex Dealer Members hold customer funds in accounts separate from the firms' operating accounts, this does not guarantee that those funds will be available to meet customer claims. Segregation under Section 4d(a)(2) of the Commodity Exchange Act adds an additional layer of protection for customers trading on an exchange because the segregated funds are used first to satisfy those customers' priority claims. If the firm is properly segregated, this ensures that customers trading on an exchange will be made whole.

This is not the case for off-exchange forex transactions, however. The segregation requirement does not apply to these transactions because Section 2(c) of the CEA exempts them from most provisions of the Act, including Section 4d(a)(2). While a forex dealer can choose to keep customer forex funds in separate accounts, the Bankruptcy Code may treat them as general assets of the bankruptcy estate that would be available to meet the claims of all general and priority creditors.

As noted above, retail forex customers do not appear to appreciate these distinctions. NFA is also aware of several instances where solicitors or employees of Forex Dealer Members have actually told customers their funds were segregated or protected in bankruptcy. Although those representations violate NFA's forex requirements in their current form, NFA believes it is important for Forex Dealer Members to make an affirmative disclosure that bankruptcy protections may not apply. Therefore, NFA is amending the Interpretive Notice regarding Forex Transactions with Forex Dealer Members to require an affirmative disclosure.

NFA understands that some attorneys have taken the position, in connection with the Refco bankruptcy, that forex customers receive the same protections as customers trading on an exchange. This question may have to be resolved by the courts at some point. The disclaimer adopted by the Board states that forex transactions "may not" carry the same bankruptcy protections, not that they do not. NFA will revise the disclosure if the courts resolve the question.

Forex Weekly Reports

Section 8 of NFA's Financial Requirements authorizes staff to require FCMs and IBs to file financial reports not otherwise specified in the rules, and NFA currently requires all Forex Dealer Members to file weekly reports showing liabilities to customers, as well as other financial information. The report must contain information as of the end of the week and must be filed electronically by noon on the next business day.

Most Forex Dealer Members file their weekly reports on time. Since these reports help NFA identify potential financial problems, even the occasional late report can be troubling, however. For example, the Forex Dealer Member subject to NFA's latest MRA had not filed reports for two weeks.

Late filings may result in a Business Conduct Committee Complaint, but there is no immediate penalty for filing the weekly reports late. Adding a new Section 13 to the Financial Requirements codifies the staff-imposed requirement to file these weekly forex reports and imposes an automatic $200 fee for each day they are late. This late fee mirrors the fee imposed on FCMs and IBs that file late financial statements.

NFA respectfully requests that the Commission review and approve the proposed amendments to the Financial Requirements to add a new Section 13 regarding Forex Dealer Member weekly reports and to the Interpretive Notice regarding forex transactions with Forex Dealer Members.

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